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Finance Flashcards

Business Finance Test 3

The net present value method – is consistent with the goal of shareholder wealth maximization.- recognizes the time value of money.- uses all of a project’s cash flows.
What is the internal rate of return’s assumption about how cash flows are reinvested? They are reinvested at the project’s internal rate of return.
We compute the profitability index of a capital budgeting proposal by dividing the present value of the annual after tax cash flows by the cash investment in the project.
Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives? The equivalent annual annuity.
All of the following are criticisms of the payback period criterion except: It deals with accounting profits as opposed to cash flows.
A significant disadvantage of the internal rate of return is that it: -may have an unrealistic reinvestment assumption with respect to the discount rate used for re-investment of the cash flows.-Can result in multiple rates of return (more than one IRR).
Under what condition would you not accept a project that has a positive net present value? If the firm is limited in the capital it has available (capital rationing).
The Net Present Value (or NPV) criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________, and the Internal Rate of Return (or IRR) criteria assumes that expected future cash flows are reinvested at ________. the firm’s appropriate discount rate, the internal rate of return
A project would be acceptable if: The net present value is positive.
All of the following are sufficient indications to accept a project except (assume that there is no capital rationing constraint, and no consideration is given to payback as a decision tool): The IRR of a mutually exclusive project exceeds the required rate of return.
When reviewing the net present value profile for a project the IRR will always be a point on the horizontal axis line where NPV = 0.
The net present value always provides the correct decision provided that capital rationing is not imposed.
Which of the following statements about the internal rate of return (IRR) is true? It fully considers the time value of money.
A significant disadvantage of the payback period is that it: Does not properly consider the time value of money.
Mutually exclusive projects occur when: A set of investment proposals perform essentially the same task.
A significant advantage of the internal rate of return is that it: Considers all of a project’s cash flows and their timing.
Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a required return of 12 percent. Which of the following statements is most correct? Both projects have a positive net present value (NPV).
Which of the following statements is most correct? The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the IRR.
The internal rate of return is: The discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
Which of the following statements about the net present value is true? It may be used to select among projects of different sizes.
An independent project should be accepted if it:
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Finance Flashcards

Business Finance 2

Net working capital is defined as:A. the depreciated book value of a firm’s fixed assets.B. the value of a firm’s current assets.C. available cash minus current liabilities.D. total assets minus total liabilities.E. current assets minus current liabilities. E. current assets minus current liabilities.
The accounting statement that measures the revenues, expenses, and net income of a firm over aperiod of time is called the:A. statement of cash flows.B. income statement.C. GAAP statement.D. balance sheet.E. net working capital schedule. B. income statement.
The tax rate that determines the amount of tax that will be due on the next dollar of taxable incomeearned is called the:A. average tax rate.B. variable tax rate.C. marginal tax rate.D. fixed tax rate.E. ordinary tax rate C. marginal tax rate.
Production equipment is classified as:A. a net working capital item.B. a current liability.C. a current asset.D. a tangible fixed asset.E. an intangible fixed asset. D. a tangible fixed asset.
Shareholders’ equity is equal to:A. total assets plus total liabilities.B. net fixed assets minus total liabilities.C. net fixed assets minus long-term debt plus net working capital.D. net working capital plus total assets.E. total assets minus net working capital. C. net fixed assets minus long-term debt plus net working capital.
Which one of the following statements concerning the balance sheet is correct?A. Total assets equal total liabilities minus total equity.B. Net working capital is equal total assets minus total liabilities.C. Assets are listed in descending order of liquidity.D. Current assets are equal to total assets minus net working capital.E. Shareholders’ equity is equal to net working capital minus net fixed assets plus long-term debt. C. Assets are listed in descending order of liquidity.
An income statement prepared according to GAAP:A. reflects the net cash flows of a firm over a stated period of time.B. reflects the financial position of a firm as of a particular date.C. distinguishes variable costs from fixed costs.D. records revenue when payment for a sale is received.E. records expenses based on the matching principle. E. records expenses based on the matching principle.
Net income increases when:A. fixed costs increase.B. depreciation increases.C. the average tax rate increases.D. revenue increases.E. dividends cease. D. revenue increases.
Given a profitable firm, depreciation:A. increases net income.B. increases net fixed assets.C. decreases net working capital.D. lowers taxes.E. has no effect on net income D. lowers taxes.
An increase in which one of the following will increase operating cash flow for a profitable, tax-payingfirm?A. Fixed expensesB. Marginal tax rateC. Net capital spendingD. InventoryE. Depreciation E. Depreciation
A negative cash flow to stockholders indicates a firm:A. had a net loss for the year.B. had a positive cash flow to creditors.C. paid dividends that exceeded the amount of the net new equity.D. repurchased more shares than it sold.E. received more from selling stock than it paid out to shareholders. E. received more from selling stock than it paid out to shareholders.
Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. Thecash flow statement for last year must have which one of the following assuming that no new shares wereissued?A. Positive operating cash flowB. Negative cash flow from assetsC. Positive net incomeD. Negative operating cash flowE. Positive cash flow to stockholders E. Positive cash flow to stockholders
ANC Plastics has net working capital of $15,400, current assets of $39,200, equity of $46,600, andlong-term debt of $22,100. What is the amount of the net fixed assets?A. $50,800B. $56,900C. $45,500D. $48,100E. $53,300Net fixed assets = $22,100 + 46,600- 15,400 = $53,300 E. $53,300Net fixed assets = $22,100 + 46,600- 15,400 = $53,300
Plenti-Good Foods has ending net fixed assets of $98,700 and beginning net fixed assets of $84,900.During the year, the firm sold assets with a total book value of $13,200 and also recorded $9,800 indepreciation expense. How much did the company spend to buy new fixed assets?A. -$23,900B. $9,200C. $36,800D. $40,700E. $37,400New fixed asset purchases = $98,700 + 9,800 + 13,200-84,900 = $36,800 C. $36,800New fixed asset purchases = $98,700 + 9,800 + 13,200-84,900 = $36,800
Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assetsof $380,200. What is the value of the current liabilities?A. $61,700B. $88,40000C. $102,900D. $96,700E. $111,500Current liabilities = $519,300 -380,200 -42,400 = $96,700 D. $96,700Current liabilities = $519,300 -380,200 -42,400 = $96,700
Cornerstone Markets has beginning long-term debt of $64,500, which is the principal balance of a loanpayable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?A. $45,100B. $53,300C. $58,200D. $63,300E. $900Ending long-term debt = $64,500 -16,300 + 4,100 + 11,000 = $63,300 D. $63,300Ending long-term debt = $64,500 -16,300 + 4,100 + 11,000 = $63,300
Gino’s Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of$34,700, and long-term debt of $23,000. What is the value of the owners’ equity?A. $36,900B. $66,700C. $71,600D. $89,400E. $106,300Owners’ equity = $29,800 + 64,800 -23,000 = $71,600 C. $71,600Owners’ equity = $29,800 + 64,800 -23,000 = $71,600
72. Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interestpaid of $12,400. The tax rate is 28 percent. How much net income did the firm earn for the period?A. $7,778B. $9,324C. $10,380D. $8,671E. $5,886Net income = ($509,600 -448,150 -36,100 -12,400)(1 -.28) = $9,324 B. $9,324Net income = ($509,600 -448,150 -36,100 -12,400)(1 -.28) = $9,324
For the year, Uptowne Furniture had sales of $818,790, costs of $748,330, and interest paid of$24,450. The depreciation expense was $56,100 and the tax rate was 34 percent. At the beginning of theyear, the firm had retained earnings of $172,270 and common stock of $260,000. At the end of the year,retained earnings was $158,713 and common stock was $280,000. Any tax losses can be used. What isthe amount of the dividends paid for the year?A. $5,266B. $6,466C. $7,566D. $7,066E. $6,898Net income = [($818,790 -748,330-56,100 -24,450)(1 -.34)] =-$6,659Dividends paid = -$6,659 – ($158,713-172,270) = $6,898 E. $6,898Net income = [($818,790 -748,330-56,100 -24,450)(1 -.34)] =-$6,659Dividends paid = -$6,659 – ($158,713-172,270) = $6,898
Neiger Flours owes $16,929 in taxes on taxable income of $61,509. If the firm earns $100 more inincome, it will owe an additional $48 in taxes. What is the average tax rate on income of $61,609?A. 28.00 percentB. 30.33 percentC. 33.33 percentD. 35.00 percentE. 27.56 percentAverage tax rate = ($16,929 + 48)/$61,609 = .2756, or 27.56 percent E. 27.56 percentAverage tax rate = ($16,929 + 48)/$61,609 = .2756, or 27.56 percent
The financial statements of Blue Fin Marina reflect depreciation expenses of $41,600 and interestexpenses of $27,900 for the year. The current assets increased by $31,800 and the net fixed assetsincreased by $28,600. What is the amount of the net capital spending for the year?A. $13,000B. $21,600C. $28,600D. $60,400E. $70,200Net capital spending = $28,600 + 41,600 = $70,200 E. $70,200Net capital spending = $28,600 + 41,600 = $70,200
A balance sheet shows beginning values of $56,300 for current liabilities and$289,200 for long-termdebt. The ending values are $61,900 and $318,400, respectively. The income statement shows interestpaid of $29,700 and dividends of $19,000. What is the amount of the net new borrowing?A. $29,200B. $40,450C. $34,800D. $70,150E. $58,900Net new borrowing = $318,400-289,200 = $29,200 A. $29,200Net new borrowing = $318,400-289,200 = $29,200
For the past year, LP Gas, Inc., had cash flow from assets of $38,100 of which $21,500 flowed to thefirm’s stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?A. -$14,300B. -$9,700C. $12,300D. $14,300E. $18,900Cash flow to creditors = $38,100 -21,500 = $16,600Net new borrowing = $2,300 – 16,600 = -$14,300 A. -$14,300Cash flow to creditors = $38,100 -21,500 = $16,600Net new borrowing = $2,300 – 16,600 = -$14,300
Six months ago, Benders Gym repurchased $140,000 of its common stock. The company pays regulardividends totaling $18,500 per quarter. What is the amount of the cash flow to stockholders for the pastyear if 1,200 new shares were issued and sold for $38 a share?A. -$10,000B. -$20,400C. $28,500D. $74,000E. $168,400Cash flow to stockholders = ($18,500×;4) -[(1,200 ×$38) – $140,000] = $168,400 E. $168,400Cash flow to stockholders = ($18,500×;4) -[(1,200 ×$38) – $140,000] = $168,400
Able Co. has $267,000 in taxable income and Bravo Co. has $1,600,000 in taxable income. Supposeboth firms have identified a new project that will increase taxable income by $10,000. The additional projectwill increase Able Co.’s taxes by _____ and Bravo Co.’s taxes by ____[Taxable Income] [Tax Rate]TI [0-] [50000] TR [15%]TI [50001-] [75,000] TR [25]TI [75001-] [100,000] TR [34]TI [100001-] [335,000] TR [39]TI [335001-] [10,000,000] TR [34]A. $1,500; $1,500B. $1,500; $3,400C. $3,400; $3,900D. $3,900; $3,400E. $3,400; $3,400Able Co. tax = $10,000 ×39 = $3,900Bravo Co. tax = $10,000×34 = $3,400 D. $3,900; $3,400Able Co. tax = $10,000 ×39 = $3,900Bravo Co. tax = $10,000×34 = $3,400
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Finance Flashcards

Finance quiz: Chapter 3

Common-size financial statements present all balance sheet account values as a percentage of:the forecasted budget.sales.total equity.total assets.last year’s account value. Sales
The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?No new external financing of any kindNo new debt but additional external equity equal to the increase in retained earningsNew debt and external equity in equal proportionsNew debt and external equity, provided the debt-equity ratio remains constantNo new external equity and a constant debt-equity ratio No new external equity and a constant debt-equity ratio
The equity multiplier is equal to:one plus the debt-equity ratio.one plus the total asset turnover.total debt divided by total equity.total equity divided by total assets.one divided by the total asset turnover. total equity / total assets
Which ratio was primarily designed to monitor firms with negative earnings?Price-sales ratioMarket-to-book ratioProfit marginROEROA Price – sales ratio
Sweet Candies reduced its fixed assets this year without affecting the shop’s operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratioII. Return on assetsIII. Total asset turnoverIV. Return on equity Return on AssetsTotal Asset Turnover
The sustainable growth rate is based on the premise that:an additional dollar of debt will be acquired only if an additional dollar in equity shares is issued.no additional equity will be added to the firm.the debt-equity ratio will be held constant.the dividend payout ratio will be zero.the dividend payout ratio will increase at a steady rate. the debt-equity ratio will be held constant.
Financial statement analysis:is primarily used to identify account values that meet the normal standards.is limited to internal use by a firm’s managers.provides useful information that can serve as a basis for forecasting future performance.provides useful information to shareholders but not to debtholders.is enhanced by comparing results to those of a firm’s peers but not by comparing results to prior periods. provides useful information that can serve as a basis for forecasting future
Which one of the following statements is correct?Peer group analysis is easier when a firm is a conglomerate versus when it has only a single line of business.Peer group analysis is easier when seasonal firms have different fiscal years.Peer group analysis is simplified when firms use varying methods of depreciation.Comparing results across geographic locations is easier since all countries now use a common set of accounting standards.Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory. Adjustments have to be made when comparing the income statements of firms that use different methods of accounting for inventory
A firm has net working capital of $6,800 and current assets of $21,800. What is the current ratio? 0.69
Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio? 25%
The Gift Shoppe has total assets of $487,920 and an equity multiplier of 1.47. What is the debt-equity ratio? .47
A firm has net income of $28,740, depreciation of 6,170, taxes of $13,420, and interest paid of $2,605. What is the cash coverage ratio 19.55
UXZ has sales of $683,200, cost of goods sold of $512,900, and inventory of $74,315. What is the inventory turnover rate? 6.90
Kessler Cleaners has accounts receivable of $28,943, total assets of $387,600, cost of goods sold of $317,400, and a capital intensity ratio of .97. What is the accounts receivable turnover rate? 13.81
Leisure Products has sales of $738,800, cost of goods sold of $598,200, and accounts receivable of $86,700. How long on average does it take the firm’s customers to pay for their purchases? Assume a 365-day year. 42.83
Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes is equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34 percent? 1.56%
A firm has net income of $197,400, a return on assets of 8.4 percent, and a debt-equity ratio of .72. What is the return on equity? 14.45
The Blue Lagoon has a return on equity of 23.62 percent, an equity multiplier of 1.48, and a capital intensity ratio of 1.06. What is the profit margin? 15.06
World Exports has total assets of $938,280, a total asset turnover rate of 1.18, a debt-equity ratio of .47, and a return on equity of 18.7 percent. What is the firm’s net income? 119,359.43
Tessler Farms has a return on equity of 11.28 percent, a debt-equity ratio of 1.03, and a total asset turnover of .87. What is the return on assets? 5.56
A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate for the firm if it has net income of $32,600, total equity of $294,000, total assets of $503,000, and a 25 percent dividend payout ratio? 4.88
High Road Transport has a current stock price of $5.60. For the past year, the company had net income of $287,400, total equity of $992,300, sales of $1,511,000, and 750,000 shares outstanding. What is the market-to-book ratio? 4.23
A fire has destroyed a large percentage of the financial records of the Strongwell Co. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 13.8 percent. Sales were $979,000, the total debt ratio was .42, and total debt was $548,000. What is the return on assets? 8
Donegal’s Industrial Products wishes to maintain a growth rate of 6 percent a year, a debt-equity ratio of .45, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 1.25. What profit margin must the firm achieve?
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Finance Flashcards

Personal Finance Unit 1 Lesson 3

Corporate structure may be defined as____. The way a business is organized
Which of the following might not be an option for increasing your present income? Quitting your job to find another
Which of the following are effective options to pursue if you want to increase your income? Find a second jobRequest a merit increase in pay
Your resume should include all of the following information EXCEPT: Personal history
The single best way to increase your income is to get an education. Why? You can obtain jobs that have higher starting salaries
Which of the following will most likely earn a higher level of income? A female accountant with a Master’s degree in business administration
The term median means____. There are an equal number of employees earning above the amount provided and an equal number earning below the amount provided
The term average means___. The number calculated by adding all numbers together, then dividing by the total amount of numbers
The term “educational attainment” means_____. Whatever education you have gotten
Which of the following factors should be considered when deciding on a career choice? Selectall that apply Job requirement, including educational level, your skills and interests
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Finance Flashcards

Finance Chapter 11

A firm is paying an annual dividend of $2.65 for its PREFERRED STOCK that is selling for $37. Selling (flotation) cost of $3.30. What’s the after-tax cost of the preferred stock? 2.65/57-3.30= $4.93
A firm in a stable industry should use: A LARGE amount of debt to lower the cost of capital
A firm’s debt-to-equity ratio varies at times because a firm will want to: -Take advantage of timing its fund-raising in order to minimize costs over the long run-Sell common stock when prices are high and bonds when interest rates are low-The market allows some leeway in the debt-to-equity ratio before penalizing the firm with a higher cost of capital.
For a profitable firm paying 5% for new debt, the higher the firm’s tax rate, The LOWER the after-tax cost of debt.
The after-tax cost of preferred stock to the issuing corporation is the SAME as the before-tax cost
A firm’s cost of financing, in an overall sense, is equal to its -WACC-Required yield-Required rate of return
Flotation cost is the: COST of issuing NEW stock
The overall WACC is used instead of costs for individual sources because The use of the cost for specific sources of capital would make investment decisions inconsistent
If flotation cost goes up, the cost of retained earnings will stay the same.
The after-tax cost of debt will typically be below WACCCost of equityBefore-tax cost of debt
Although debt financing is usually the cheapest component of capital, it cannot be used in excess because the financial risk of the firm may increase and drive up the cost of financing
The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of the existence of flotation costs
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Finance Flashcards

Pers Finance 8

TF The opportunity costs associated with credit consumer purchases refer to the cost of an item plus any finance charges. False
TF The first step in the buying process involves information gathering. False
TF Consumers Union is a government agency that tests products for safety. False
TF The most consistent quality is usually found with nationally known, brand-name products. True
TF A limited warranty covers all aspects of the product and does not require the buyer to incur any of the costs for shipping and repairs. False
TF Store-brand products are usually inferior in quality compared to national and store-brand items. False
TF An implied warranty is usually in written form. False
TF Service contracts are usually included in the cost of appliances and other high-priced items. False
TF Many consumer complaints are the result of poorly manufactured products. True
TF Most consumer complaints need legal action to be resolved. False
TF Mediation involves a legally binding decision by a third party to solve a consumer complaint. False
TF Representation by a lawyer is usually required in small claims court. False
TF A class action suit allows many people with the same complaint to take action as a group. True
TF Prepaid legal services are programs designed to provide unlimited or reduced-fee legal assistance for a set fee. True
An example of an economic buying influence would be Inflation
A personal opportunity cost associated with a consumer purchase refers to time used to compare prices.
The first step of the consumer buying process is Identifying the problem
Which organization has the purpose of testing products for electrical and fire safety? Underwriters Laboratories
Brian Williams has a piece of paper that he gives to the cashier when he purchases a particular item that allows him to get a dollar off the cost of that item. What is he most likely using? A Coupon
The main purpose of Consumers Union is to Evaluate the quality of products and services.
Which of the following would be an advantage of leasing a vehicle? Lease payments are likely to be lower than finance payments.
A motor vehicle has annual depreciation of $2,000, oil changes cost $120, automobile insurance $500, and $100 for license plates. What is the annual amount of the total fixed cost for this vehicle? $2,600
A cooperative is designed to Sell products or services to members at reduced prices.
____________ are non-profit stores created by people in a neighborhood to serve their customers, who are also called members. Prices at this type of store are usually lower than at other retailers. Coorperatives
Cooperatives are most commonly organized to sell Food
Which of the following information is required on food labels Common Product Name
Private label products are those that are sold by one chain of stores.
Opening dating provides information on Freshness.
A 32-ounce package selling for $1.60 would have a unit price of 5 cents an ounce
The sticker price of a car refers to The suggested retail price of a new car.
Which of the following types of warranties is a specific agreement created by the seller or manufacturer? Express
Howard Ramsell recently became aware of implied warranties that exist for consumer purchases. An implied warranty exists as a result of The intended use of a product
The major criticism of service contracts is High costs and significant exclusions
The purpose of a service contract is to Protect a product owned from expensive repairs.
Pam McNally is planning to use the services of the Better Business Bureau. A major purpose of the BBB is to Resolve consumer complaints
A federal government agency designed to provide consumer information and assist with consumer complaints is the Federal Trade Commission
The process of resolving consumer complaints with the use of a third party who suggests a solution through discussion and negotiation is Mediation
____________ is the settlement of a difference by a third party whose decision is legally binding. Arbitration
The purpose of small claims court is to resolve minor consumer complaints.
Small claims court requires a person to have a case involving less than a set amount.
Recently, Jim Dahl was on a bus tour in a mountain area. The bus broke down forcing the group to stay overnight. Group members had to pay for their own hotel bills. Jim believes that the hotel cost for the group should be paid by the tour company. Which legal action would be most appropriate? Class action suit
Which of the following legal techniques best serves low-income consumers? legal aid societies
Federal Trade Commission regulations require that used car buyers be informed if the vehicle comes with a warranty.
An implied warranty that comes with a used car is that the vehicle must be in operating condition.
Most cars bought from private parties have No express Warranty
The purpose of the Edmund’s Guide is to Provide Price Data
The purpose of an automobile service contract is to repair major problems after the warranty expires
Mike Jocobs is planning to lease an automobile. In an effort to minimize the leasing price of the vehicle, Mike should compare the ____________ at different leasing companies. Money Factor
Which of the following is usually the largest fixed expense for a new vehicle? Depreciation
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Finance 301 Exam 1

Finance It addresses how money is raised and used by individuals, businesses, and governments.
Corporation This state-created entity is authorized to conduct business and offer its owners an investment with an unlimited life.
Treasurer This corporate officer is responsible for managing the firm’s cash and short-term investments, pension fund, and risks.
Limited Liability This benefit is conferred by the corporate form of organization in which an investor’s personal responsibility for the debts of the business are limited to the amount the investor has invested in the firm.
Business Ethics This code of behavior specifies how the firm and its employees will treat employees and stakeholders.
Limited Partner This is a participant in a partnership, whose personal assets may no be seized to satisfy the debts of the partnership.
Double Taxation of Dividends The US Internal Revenue Service taxes the taxable income of corporations as well as the taxable investment income of the firms’ shareholders
Shareholder Wealth Maximization This term describes the individuals and groups whose needs and wants should be identified and addressed in order to generate higher returns for the firm and ensure its viability.
Value This is the worth of a good or service as established by the discounted and current value of the item’s cash flows.
Capital Budgeting The Chief Financial Officer in a company is responsible for which of the following departments?AdministrationMarketingCapital BudgetingHuman Resources
Maximize; Common Stock According to finance theory firms should attempt to ________ the long-term price of the firm’s ______. The benefit to this objective is that it provides the best financial outcome for the firm’s share holders.
$10,300 To expand her portfolio, Piper recently purchased 400 shares of common stock in the Sanger Machine Company. The current market price of Sanger’s common stock is $25.75 per share. Piper’s total wealth from her investment in Sanger Machine Company is $_______
The analysis likely includes incorrect statements and misleading conclusions. You work as an analyst at a credit-rating agency, and you are comparing firms in the construction and engineering sector. One company in the portfolio of companies you are analyzing is a Chinese firm. THis firm stands out in the ratio analysis, because the company’s financial ratios are substantially lower than the identical financial ratios of the other firms in the sector. You do not dissect the results of the ratio analysis and categorize report this firm as an under-performing company.Which of the following statements about your analysis is report is TRUE?The analysis likely include incorrect and misleading conclusionsThe ratios provide an accurate and thorough representation of the Chinese company’s performance.
True A company exhibiting a high liquidity ratio means it is likely to have enough resources to pay off its short-term obligations.
True Asset management or activity ratios provide insights into management’s efficiency in using a firm’s working capital and long-term assets.
False Debt or financial leverage ratios help analysts determine whether a company has sufficient cash to repay its short-term debt obligations.
True One possible explanation for an increase in a firm’s profitability ratios over a certain time span is that the company’s income has increased.
True Market-value or market based ratios help analysts figure out what investors and the markets think about the firm’s growth prospects of current and future operation performance.
Different firms may use different accounting practices.A firm may operate in multiple industries. Ratio analysis is an important component of evaluating company performance. It can provide great insights into how a company matches up against itself over time and against other players within the industry. However, like many tools and techniques, ratio analysis has a few limitations and weaknesses.Which of the following statements represent a weakness or limitation of ratio analysis? (2)A firm’s financial statements show only one period of financial data.Different firms may use different accounting practices.A firm may operate in multiple industries.
Inventories Which of the following assets classes is generally considered to be the least liquid?
A current ratio of 1 indicates that the book value of the company’s current assets is equal to the book value of its current liabilities.An increase in the quick ratio over time usually means that the company’s liquidity position is improving and that the company is managing its short-term assets well. Which of the following statements is true? (2)A current ratio of 1 indicates that the book value of the company’s current assets is equal to the book value of its current liabilities.An increase in the quick ratio over time usually means that the company’s liquidity position is improving and that the company is managing its short-term assets well.An increase in the current ratio over time always means that the company’s liquidity position is improving.
27.40x Franklin Aerospace has a quick ratio of 2.00x, $32,850 in cash, $18,250 in A/R, some inventory, total current assets of $73,000, and total liabilities of $25,550. The company reported annual sales of $600,000 in the most recent annual report.Over the past year, how often did Franklin Aerospace sell and replace its inventory? (HINT: Inventory Turnover Eq.)
Franklin Aerospace is holding less inventory per dollar of sales compared to the industry average. The inventory turnover ratio across companies in the aerospace industry is 23.29x. Based on this information, which of the following statements is true for Franklin Aerospace?Franklin Aerospace is holding more inventory per dollar of sales compared to the industry average.Franklin Aerospace is holding less inventory per dollar of sales compared to the industry average.
Company A Companies have the opportunity to use varying amounts of different sources of financing to acquire their assets, including internal and external sources, and debt (borrowed) and equity funds.Company A uses long-term debt to finance its assets and Company B uses capital generated from shareholders to finance its assets. Which company would be considered a financially leveraged firm?Company ACompany B
Under economic growth conditions, firms with relatively more leverage will have higher expected returns. Which of the following is TRUE about the leveraging effect?Under economic growth conditions, firms with relatively more leverage will have higher expected returns.Under economic growth conditions, firms with relatively low leverage will have higher expected returns.
Encourages The US tax structure influences a firm’s willingness to finance with debt. The tax structure (encourages/ discourages) more debt?
If a company has a profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales.If a company’s operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. Decision makers and analysts look deeply into profitability ratios to identify trends in a company’s profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios?An increase in a company’s earnings means that the profit margin is increasing.If a company has a profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales.If a company’s operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.If a company issues new common shares but its net income does not increase, return on common equity will increase.
$18.55 per share Fuzzy Button Clothing Company just reported earnings after tax (Net Income) of $8.5 Million, and a current stock price of $20.25 per share. The company is forecasting an increase of 25% for its after-tax income next year, but it also expects it will have to issue 2 million new shares of stock (raising its shares outstanding from 5.5 million to 7.5 million.If FB forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does the company’s management expect
13.37x One year late FB’s shares are trading at $49.60 per share, and the company reports the value of its total common equity as $27,825,000. Given this information, FB’s market-to-book ratio is ________.
Yes Can a company’s shares exhibit a negative P/E ratio?
Companies with high research hand development (R&D) expenses tend to have high P/E ratios. Which of the following statements is TRUE about market value ratios?Companies with high research hand development (R&D) expenses tend to have high P/E ratios.Companies with high research hand development (R&D) expenses tend to have low P/E ratios.
Sometimes An increase in ROE would (never/sometimes/ always) imply an increase in shareholder wealth.
Project Y, with 40% ROE and a small investment, generating low expected cash flows. Based on your understanding of the uses and limitations of ROE, which of the following projects will a manager likely choose if his or her bones is solely based on the ROE of the next project?Project X, with 35% ROE and a large investment, generating high expected cash flows.Project Y, with 40% ROE and a small investment, generating low expected cash flows.
More You decide also to conduct a qualitative analysis based on the factors summarized by the American Association of Individual Investors (AAII). According to your understanding, a company with one key product is considered to be (more/less) risky than companies with a wide range of products.
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Finance Flashcards

Ch. 8 Finance

The weak form of the EMH states that ________ must be reflected in the current stock price.A. all past information, including security price and volume data B. all publicly available information C. all information, including inside information D. all costless information A. all past information, including security price and volume data
1.0 PointsThe semistrong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information, including inside information D. all costless information B. all publicly available information
The strong form of the EMH states that ________ must be reflected in the current stock price. A. all security price and volume data B. all publicly available information C. all information, including inside information D. all costless information C. all information, including inside information
Random price movements indicate A. irrational markets B. that prices cannot equal fundamental values C. that technical analysis to uncover trends can be quite useful D. that markets are functioning efficiently D. that markets are functioning efficiently
Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior. A. short-run; short-run B. long-run; long-run C. long-run; short-run D. short-run; long run D. short-run; long run
Which one of the following is NOT correct? A. Choosing stocks by searching for predictable patterns in stock prices is called technical analysis. B. fundamental analysts tries to identify mispriced stocks C. An abnormal return is the return on a stock beyond what would be predicted from market movements alone. D. Most people would readily agree that the stock market is not weak-form efficient D. Most people would readily agree that the stock market is not weak-form efficient
Which one of the following statement is NOT correct? A. Proponents of the EMH think technical analysts are wasting their time B. Evidence supporting semistrong-form market efficiency suggests that investors should use a passive trading strategy such as purchasing an index fund or an ETF C. When stock returns exhibit positive serial correlation, this means that positive returns tend to follow negative returns. D. The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor C. When stock returns exhibit positive serial correlation, this means that positive returns tend to follow negative returns.
which one of the following is NOT correct? A. Small firms have tended to earn abnormal returns. B. Fama and French have suggested that many market anomalies can be explained as manifestations of varying risk premiums C. Even if the markets are efficient, professional portfolio management is still important because it provides investors with low-cost diversification and a portfolio with a specified risk level. D. None of the above. D. None of the above.
Which one of the following is NOT correct? A. changes in stock prices/return follow a random walk. B. Stock price/return moves randomly because the information arrives at the market randomly C. Competition makes sure that the information is reflected in stock prices instantly. D. Random changes in stock prices indicates that the market is not rational. D. Random changes in stock prices indicates that the market is not rational.
1. The weak form EMH states that ________ must be reflected in the stock price. A) all market trading data B) all publicly available information C) all information including inside information D) none of the above A) all market trading data
1. The semi-strong form EMH states that ________ must be reflected in the stock price. A) all market trading data B) all publicly available information C) all information including inside information D) none of the above B) all publicly available information
1. If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. A. semi-strongB. strongC. weakD. perfect A. semi-strong
1. The tendency of poorly performing stocks and well performing stocks in one period to continue their performance into the next period is called the ________________. A. fad effectB. martingale effectC. momentum effectD. reversal effect C. momentum effect
1. Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior. A) short-run, short-run B) long-run, long-run C) long-run, short-run D) short-run, long run D) short-run, long run
1. __________ is the return on a stock beyond what would be predicted from market movements alone. A) a normal return B) a subliminal return C) an abnormal return D) none of the above C) an abnormal return
1. Which of the following have not been considered market anomalies? A) the small-firm effect B) the reversal effect C) the book-to-market effect D) All of the above have been considered market anomalies D) All of the above have been considered market anomalies
1. Which one of the following is not right? a) Studies suggest that large firms on average have higher returns than small firms.b) Firms with high book to market ratio tend to have higher returns.c) Stock price react sluggishly to earning announcement.d) All of the above is right. a) Studies suggest that large firms on average have higher returns than small firms.
1. When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns. A) positive; positive B) positive ; negative C) negative; positive D) None of the above A) positive; positive
1. The term random walk is used in investments to refer to ______________. A) stock price changes that are random but predictable B) stock prices that respond slowly to both old and new information C) stock price changes that are random and unpredictable D) stock prices changes that follow the pattern of past price changes C) stock price changes that are random and unpredictable
1. Assume that a company announces some good news in a particular quarter. In an efficient market one might expect _____________. A) an abnormal price change immediately following the announcement B) an abnormal price increase before the announcement C) an abnormal price decrease after the announcement D) no abnormal price change before or after the announcement A) an abnormal price change immediately following the announcement
1. Which of the following is not a method employed by fundamental analysts? A. Analyzing the Fed’s next interest rate moveB. Charting C. Earnings forecastingD. Estimating the economic growth rate B. Charting
1. Choosing stocks by searching for predictable patterns in stock prices is called ________. A. fundamental analysisB. technical analysisC. index managementD. random walk investing B. technical analysis
1. Most people would readily agree that the stock market is not _________. A. weak form efficientB. semi-strong form efficientC. strong form efficientD. efficient at all C. strong form efficient
1. Proponents of the EMH think technical analysts __________. A. should focus on relative strengthB. should focus on resistance levelsC. should focus on support levelsD. are wasting their time D. are wasting their time
1. Evidence supporting semi-strong form market efficiency suggests that investors should _________________________. A. rely on technical analysis to select securitiesB. rely on fundamental analysis to select securitiesC. use a passive trading strategy such as purchasing an index fund or an ETFD. select securities by throwing darts at the financial pages of the newspaper C. use a passive trading strategy such as purchasing an index fund or an ETF
1. Which one of the following statements is NOT correct? A. Fama and French (1991) and Reinganum (1988) found that firms with low book to market ratios had higher stock returns. B. According to recent research securities markets fully adjust to earnings announcements gradually over timeC. Evidence suggests that corporate insiders do make abnormal returns.D. None of the above A. Fama and French (1991) and Reinganum (1988) found that firms with low book to market ratios had higher stock returns.
1. Even if the markets are efficient, professional portfolio management is still important because it provides investors with _________.I. low cost diversificationII. provides a portfolio with a specified risk levelIII. provides better risk adjusted returns than an index A. I onlyB. I and II onlyC. II and III onlyD. I, II and III B. I and II only
1. Most evidence indicates that U.S. stock markets are _______________________. A. reasonably weak form and semi-strong form efficientB. strong form efficientC. reasonably weak form but not semi- or strong form efficientD. neither weak form, semi- or strong form efficient A. reasonably weak form and semi-strong form efficient
1. Which one of the following statement is true?A. The primary objective of fundamental analysis is to identify well run firmsB. Random price movements indicate that markets are not functioning efficiently C. Market anomaly refers to price behavior that differs from the behavior predicted by the efficient market hypothesis D. None of the above C. Market anomaly refers to price behavior that differs from the behavior predicted by the efficient market hypothesis
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Finance Flashcards

Finance 450 – Chapter 1 – Quiz 1

Corporation A legal entity separate from its owners.
Provide limited liability & avoid double taxation Limited liability companies are primarily designed to:
Market value of existing stock. The primary goal of financial management is to maximize:
Increase the protections against corporate fraud. Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002?
Automatically increasing management salaries on an annual basis. Probably the least effective means of aligning management goals with shareholder interests is:
Secondary market. You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the:
Working capital management. Theo’s BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts as referred to as:
Stakeholders. An employee has a claim on the cash flows of Martin’s Machines. This claim is defined as a claim by one of the firm’s:
The controller reports directly to the chief financial officer. Which one of the following correctly defines a common chain of command within a corporation?
Limited partnership Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners?
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Finance Flashcards

Finance Exam 1

mixture of debt and equity is referred to as the firm’s: capital structure
Jenna has been promoted and is now in charge of all external financing. In other words, she is in charge of: capital structure management
Theo’s BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts as referred to as: working capital management.
An agency issue is most apt to develop when: the control of a firm is separated from the firm’s ownership.
Which one of the following is a working capital decision? How much cash should the firm keep in reserve?
Which one of the following is a capital structure decision? Establishing the preferred debt-equity level
Working capital management includes which one of the following? Determining which customers will be granted credit
The daily financial operations of a firm are primarily controlled by managing the: working capital
The Sarbanes-Oxley Act of 2002 has: essentially made officers of publicly traded firms personally responsible for the firm’s financial statements.-Increase the protections against corporate fraud
Which one of the following situations is most apt to create an agency conflict? Basing management bonuses on the length of employment
An auction market: has a physical trading floor
Beginning in 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires corporations with a market value over ________ to allow a nonbinding shareholder vote on executive pay. $75,000,000
Which one of the following statements related to securities dealers is correct? Dealers buy and sell from their own inventory
Which one of the following has nearly the same meaning as free cash flow Cash Flow from assets
Shareholders’ equity is the residual value of a firm. (T/F) True
Financial leverage: the use of borrowed funds to increase the return on owners’ equity
Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period? Positive cash flow form assets
The T-shirt Hut successfully managed to reduce its general and administrative costs this year. This cost improvement will increase which of the following ratios? I. Profit marginII. Return on assetsIV. Return on equity
Which one of the following is a graphical representation of the operating and cash cycles? Cash flow Time Line
Accounts receivable financing is the term used to describe which one of the following types of loans that involve either the assignment or the factoring of a firm’s accounts receivable? Secured Short Term Loan
A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy. (T/F) True
Which statement related to a cash budget is correct? Financially healthy firms can have a negative quarterly net cash inflow.